The Coca-Cola Company (A) In April 1999, Jane Wilson, a recently appointed beverage industry research analyst for a small mutual fund, was reviewing the fund's Coca-Cola Company ("Coca-Cola") common stock position. In particular, Wilson was trying to answer the question "In order to fully appreciate Coca-Cola's profitability, financial risk, and operating risk, should she be analyzing Coca-Cola as a stand-alone company or should she be analyzing Coca-Cola and the bottlers in which Coca-Cola had a substantial noncontrolling equity interest on a consolidated financial statement basis?" At the end of 1998, Coca-Cola had substantial equity positions in approximately 46 unconsolidated bottling, canning, and distribution operations for its products worldwide. In order to get a preliminary sense of the possible financial statement consequences of looking at Coca-Cola and those unconsolidated bottlers in which it held a substantial equity interest on a consolidated financial statement basis, Wilson decided to focus initially on Coca-Cola's Coca-Cola Enterprises ("Enterprises") relationship and its potential consolidated financial statement implications. Enterprises accounted for approximately 50% of Coca-Cola's U.S. gallon concentrate and syrup sales during 1998. At March 5, 1999, Coca-Cola held an ownership interest of approximately 40% in the publicly traded Enterprises, which is the largest bottler of Coca-Cola trademark beverages.

The Company

Coca-Cola was the largest manufacturer, distributor, and marketer of soft drink concentrates and syrups in the world. Finished soft drink products bearing the company's trademarks sold in nearly 200 countries and included the leading soft drink products in most of these countries. The company also was the world's largest distributor and marketer of juice and juice drink products. Concentrates and syrups for bottled and canned beverages are sold by Coca-Cola to authorized bottling and canning operations. The bottlers or canners of soft drink products either combine the syrup with carbonated water or combine the concentrate with sweetener, water, and carbonated water to produce finished soft drinks. The finished soft drinks are packaged in authorized containers bearing Coca-Cola's trademarks cans, refillable and nonrefillable glass and plastic bottles- for sale to retailers or, in some cases, wholesalers.

Fountain syrups are manufactured and sold by Coca-Cola, principally in the United States, to authorized fountain wholesalers and some fountain retailers. Outside the United States, fountain syrups typically are manufactured by authorized bottlers from concentrates sold to them by Coca-Cola. Authorized fountain wholesalers (including certain authorized bottlers) sell fountain syrups to fountain retailers. The fountain retailers use dispensing equipment to mix the syrup with carbonated or still water and then sell finished soft drinks or noncarbonated beverages to consumers in cups and glasses. Finished beverages manufactured by Coca-Cola are sold by it to authorized bottlers or distributors, who in turn sell these products to retailers or, in some cases, wholesalers.

Bottling Company Relationships Coca-Cola has business relationships with three types of bottlers: (1) independently owned bottlers, in which Coca-Cola has no ownership interest; (2) bottlers in which Coca-Cola has invested and has a noncontrolling ownership interest; and (3) bottlers in which Coca-Cola has invested and has a controlling ownership interest. In 1998, independently owned bottling operations produced and distributed approximately 34% of Coca-Cola's worldwide unit case volume; cost or equity method investee bottlers in which Coca-Cola owns a noncontrolling ownership interest produced and distributed approximately 55% of Coca-Colas worldwide unit case volume; and controlled and consolidated bottling and fountain operations produced and distributed approximately 11% of Coca-Cola's worldwide unit case volume. Coca-Cola makes equity investments in selected bottling operations with the intention of maximizing the strength and efficiency of the Coca-Cola business system's production, distribution, and marketing systems around the world. These investments often result in increases in unit case volume, net revenues, and profits at the bottler level, which in turn generate increased gallon sales for Coca-Cola's concentrate business. The level of Coca-Cola's investment in a bottling company generally depends on the bottler's capital structure and its available resources at the time of the investment. In certain situations, it can further Coca-Cola's business interests to acquire a controlling interest in a bottling operation. Although not Coca-Cola's primary long-term business strategy, owning a controlling interest and providing resources may compensate for limited local resources, help focus the bottler's sales and marketing programs, assist in the development of the bottler's business and information systems, and assist in the establishment of appropriate capital structures.

In line with its long-term bottling strategy, Coca-Cola periodically considers options for reducing its ownership interest in a consolidated bottler. One such option is to combine Coca-Cola's bottling interests with the bottling interests of others to form strategic business alliances. Another option is to sell Coca-Cola's interest in a consolidated bottling operation to one of Coca-Cola's noncontrolled equity investee bottlers. In both of these situations, Coca-Cola continues participating in the previously consolidated bottler's earnings through its portion of the equity investee's income. In cases where Coca-Cola's investments in bottlers represent noncontrolling interests, Coca-Cola's intention is to provide expertise and resources to strengthen those businesses.

1 The term "unit case" means a unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings); and "unit case volume," which refers to the number of unit cases sold by bottlers of Coca-Cola Trademark Beverages to customers, includes Coca-Cola products (excluding products distributed by The Minute Maid Company) reported as gallon sales, and certain other key products owned by such bottlers. Relative to gallon sales, Coca-Cola believes unit case volume more accurately measures the underlying strength of its business system because it measures trends at the retail level. Certain bottling operations in which Coca-Cola has a noncontrolling ownership interest are designated as "anchor bottlers" due to their level of responsibility and performance. Anchor bottlers tend to be large and geographically diverse with strong financial resources for long-term investment and strong management resources. In 1998, anchor bottlers produced and distributed approximately 43% of Coca-Cola's worldwide unit case volume. As of March 15, 1999, 10 companies were designated as anchor bottlers.

Bottler Equity Transactions

Coca-Cola's financial statements are impacted in two ways from the sale of equity interests in bottlers. For example, in 1998, other income-net totaled $230 million and primarily included gains recorded after providing for deferred taxes on the sales of Coca-Cola's bottling operations in northern and central Italy.

In 1997, other income-net increased $496 million and included gains after providing for deferred taxes totaling $508 million on the sales of Coca-Cola's interests in Coca-Cola and Schweppes Beverages Ltd., Coca-Cola Beverages Ltd. of Canada, and The Coca-Cola Bottling Company of New York, Inc. Gains on other bottling transactions are also included in other income-net.

At the time an equity investee bottler sells its stock to third parties at a price in excess of the book value of Coca-Cola's investment, Coca-Cola's equity in the underlying net assets of that investee increases. Coca-Cola generally records an increase to its investment account and a corresponding noncash gain on these transactions.

As a result of sales of stock by certain equity investees, Coca-Cola recorded pretax gains of approximately $27 million in 1998 and approximately $363 million in 1997. These gains represent the increase in Coca-Cola's equity in the underlying net assets of the related investee.

Coca-Cola's 1998 Form 10-K filing with the Securities and Exchange Commission noted: The carrying amount of our investment in Coca-Cola Enterprises increased in 1998 as a result of Coca-Cola Enterprises' issuance of stock in its acquisitions of various bottling operations. The carrying value of our investment in Coca-Cola Amatil increased due to its acquisition of our bottling operations in South Korea, offset by the spin-off of Coca-Cola Beverages to its shareowners. The increase for Coca-Cola Beverages is primarily a result of our equity participation in its formation in 1998, as previously discussed, and the sale to Coca-Cola Beverages of our bottling operations in northern and central Italy.

Principal Shareowners As of February 20, 1998, the following entities beneficially owned the share amounts of Coca-Cola's issued and outstanding common shares:

Number of Shares Beneficially Owned Percent of Class Berkshire Hathaway Inc. 200,000,000 8.1%

SunTrust Bank, Inc. 151,135,261 6.1 Exhibit 1 presents Coca-Cola's year-end 1997 and 1998 balance sheets and 1996-1998 income

Coca-Cola Enterprises, Inc. Enterprises was a wholly owned subsidiary of Coca-Cola until it became a public company in 1986. In 1998, Enterprises was the largest soft-drink bottler in the world, operating in seven countries, and is one of Coca-Cola's anchor bottlers. Approximately 90% of its sales are Coca-Cola products.

Coca-Cola accounted for its investment in Enterprises by the equity method of accounting. Coca-Cola's equity in the underlying net assets of Coca-Cola Enterprises over its investment is primarily amortized on a straight-line basis over 40 years. The balance of this excess, net of amortization, was approximately $442 million at December 31, 1998.

Coca Cola's 1098 Form 10-K noted the rofowing: Our net concentrate/syrup sales to Coca-Cola Enterprises were $3.1 billion in 1998, $2.5 billion in 1997, and $1.6 billion in 1996, or approximately 16%, 13%, and 9% of our 1998, 1997, and 1996 net operating revenues. Coca-Cola Enterprises purchases sweeteners through our company; however, related collections from Coca-Cola Enterprises and payments to suppliers are not included in our consolidated statements of income. These transactions amounted to $252 million in 1998, $223 million in 1997, and $247 million in 1996. We also provide certain administrative and other services to Coca-Cola Enterprises under negotiated fee arrangements. Our direct support for certain marketing activities of Coca-Cola Enterprises and participation with them in cooperative advertising and other marketing programs amounted to approximately $899 million in 1998, $604 million in 1997, and $448 million in 1996. Additionally, in 1998 and 1997, we committed approximately $324 million and $190 million, respectively, to Coca-Cola Enterprises under a company program that encourages bottlers to invest in building and supporting beverage infrastructure.

If valued at the December 31, 1998, quoted closing price of publicly traded Coca-Cola Enterprises shares, the calculated value of our investment in Coca-Cola Enterprises would have exceeded its carrying value by approximately $5.5 billion. Enterprises recognizes the infrastructure payments from Coca-Cola as revenue in the period they are received. Coca-Cola's accounting treatment for these same payments was described in Coca-Cola's 1998 10-K as follows: Our company invests in infrastructure programs with our bottlers who are directed at strengthening our bottling system and increasing unit case sales. The costs of these programs are recorded in other assets and are subsequently amortized over the periods to be directly benefited.

Beverage Agreements Enterprises purchases its entire concentrate and syrup requirements from Coca-Cola and produces, markets, and distributes its principal products under various beverage agreements with Coca-Cola. With respect to its domestic cola beverage agreement with Coca-Cola, Enterprises in its 1998

Form 10-K noted:

The domestic Cola Beverage Agreements are perpetual, but they are subject to termination by The Coca-Cola Company upon the occurrence of an event of default by the company. Events of default with respect to each Cola Beverage Agreement include: (i) production or sale of any cola product not authorized by The Coca-Cola Company; (il) insolvency, bankruptcy, dissolution, receivership, or the like; (iti) any disposition by the company of any voting securities of any bottling company without the consent of The Coca-Cola Company; and (iv) any material breach of any obligation of the company under that Cola Beverage Agreement that remains uncured for 120 days after notice by The Coca-Cola Company. If any Cola Beverage Agreement is terminated because of an event of default, The Coca-Cola Company has the right to terminate all other Cola Beverage Agreements held by the company.

In addition, each Cola Beverage Agreement held by the company provides that The Coca-Cola Company has the right to terminate that Cola Beverage Agreement if a person or affiliated group (with specified exceptions) acquires or obtains any contract, option, conversion privilege, or other right to acquire, directly or indirectly, beneficial ownership of more than 10% of any class or series of voting securities of the company. However, The Coca-Cola Company has agreed with the company that this provision will not apply with respect to the ownership of any class or series of voting securities of the company, although it would apply to the voting securities of each bottling company subsidiary.

Typically under the beverage agreements Coca-Cola sets the price of concentrates and syrups. Enterprises is free to establish resale prices for its products, but Coca-Cola at its sole discretion may determine what types of containers may be used for Coca-Cola trademark products. The agreements also obligate Enterprises to meet annually with Coca-Cola to present its marketing, management, and advertising plans with respect to Coca-Cola trademark products, and its financial plans for the year.

Acquisitions Enterprises has an active program to acquire bottling operations having Coca-Cola franchises. In recent years some of these acquisitions have been of Coca-Cola's equity in bottling companies. For example, in August 1997, Enterprises acquired Coca-Cola's 48% interest in Coca-Cola Beverages Ltd. and Coca-Cola's 49% interest in The Coca-Cola Bottling Company of New York. Earlier, in February 1997, Enterprises purchased Amalgamated Beverages Great Britain Limited from Coca-Cola and Cadbury Schweppes plc.

Financial Statements Exhibit 2 presents Enterprises year-end 1997 and 1998 balance sheets and its 1996-1998 income and cash flow statements.

Questions 1. What role does Coca-Cola's various ownership interests in its bottler companies play in the company's global strategy?

2. How are the following transactions accounted for by Coca-Cola? (a)Sale of concentrate and syrup to Enterprises? (b)Enterprises' purchase of sweeteners through Coca-Cola? (c)Receipt of cooperative advertising payments from Enterprises? (d)Coca-Cola's direct support marketing payments to Enterprises? (e)Fees received for administrative services provided to Enterprises? (f)Infrastructure improvement payments made to Enterprises? (g)Sales of bottler ownership investments to Enterprises? (h)Enterprises" issuance of common stock to acquire bottlers? (i)Coca-Cola's equity investment in Enterprises?

3. If Enterprises was included in Coca-Cola's consolidated financial statements on a fully consolidated basis, how might Coca-Cola's accounting for the above transactions change? As a result of these changes, what might be the direction and approximate order of magnitude effect on Coca-Cola's asset turnover ratio (sales /total assets)? Return on sales percentage (net income/sales)? Total leverage ratio (total assets/owners' equity)? income/owners' equitv)? Return on equity (net income/ owners equity)?

4. Do you believe Coca-Cola should include Enterprises in its consolidated financial statements on a fully consolidated basis?

5. How would you answer Wilson's question?

Exhibit 1 & Exhibit 2 - photo attached

\fl'v v... Exhibit 2 (continued) Coca-Cola Enter of Cash Flow (in millions) PriseS, Inc1996, 1997, and 1998 Consolidated Statements \\______ Year Ended December 31, \\W 3:in Flows from Operating Activities Inc ome $ 142 $ 171 $ 114 Adjustments to reconcil ' _ e net Income to net cash derived from operating activities: Depreciation 725 566 392 Amortization 395 380 235 Deferred income tax benefit (33) (8) (2) Changes. in assets and liabilities, net of effects from acqwsmons of bottling operations: Trade accounts and other receivables (259) (55) '56 Inventories (50) (17) 24 Prepaid expenses and other assets (58) (20) 10 Accounts payable and accrued expenses 133 (45) 113 Other (49) 43 49 Net cash derived from operating activities 946 942 $1,006 Cash Flows from Investing Activities Investments in capital assets ($1,551) $ (967) $ (622) Fixed asset disposals 17 20 12 Investments in bottling operations, net of cash acquired ($1,580 and $533 were paid to The Coca-Cola Company for bottling (221) (1,987) (676) operations in 1997 and 1996, respectively) Other investing activities (86) - Net cash used in investing activities ($1,841) ($2,934) ($1,286) Cash Flows from Financing Activities 5,008 4,630 875 Issuance of long-term debt Payments on long-term debt (3,500) (2.613) (359) Stock purchases for treasury (455) _ (183) Dividend payments on common and preferred stock (58) (33) (19) Exercise of employee stock options 23 13 10 Additional financing activities -- (7) (5) Net cash derived from financing activities 918 $1,990 $ 319 Net Increase (Decrease) in Cash and Cash Investments $ 23 $ (2) $ 39 Cash and cash investments at beginning of year 45 47 3 Cash and Cash Investments at End of Year 9 68 s 45 s 47 _________________________- The Cocacola Company (A) 100-001 mm\" 1 \"mama\" The Coca-Cola Company and Subsidiaries1996, 1997, and 1998 COHSOdated Statements 0f Income (in millions except per share data) \"/ Year Ended December 31, 1996 1998 1 997 Net Operating Revenues $18,813 $18,868 95185;: Cost of goods sold 5 562 AM :-7 Gross Profit $13,251 $12,853 $11,935 Selling, administrative and general expense 8,284 'LELZ AM Operating Income $ 4,967 $5,001 $3315 Interest income 219 21 1 233 Interest expense 277 258 285 Equity income 32 155 21 1 Other incomenet 230 583 87 Gains on issuance of stock by equity investees 27 _5_3 A Income Before Income Taxes $ 5,198 $ 6,055 $ 4595 Income taxes 1,665 1,926 1 ,104 Net Income $ 3,533 4.129 $ 3,492 Basic Net Income per Share $1.43 $1.67 $1.40 Diluted Net Income per Share 1.42 1.64 1 38 ' '7'\